Natural Gas Beats Coal for the Second Time in History
(Continued from Prior Part)
Natural gas prices
Natural gas prices in the spot market dropped again to $2.56 per MMBtu (million British thermal units) on September 25, 2015, compared to $2.61 per MMBtu on September 18. Natural gas prices remained volatile throughout the week.
Natural gas prices rose on Thursday, September 24, even after a bearish inventory report, as we saw in part 1. But the gains were wiped out on Friday, September 25.
Natural gas futures dropped with higher magnitude. The natural gas front month futures price gives you an idea of market expectations for near-term natural gas prices. Prices dropped marginally to $2.55 per MMBtu on September 25 from $2.63 per MMBtu on September 18. With this, futures prices came in lower than spot prices, a phenomenon known as backwardation. The reverse of backwardation is known as contango, a situation where futures prices are higher than spot prices.
Why are these indicators important?
The shale gas boom led to a massive rise in natural gas production, which in turn spurred a drop in natural gas prices. As a result, natural gas is competing hard against coal. Cleaner, more competitive natural gas ate away market share from coal in electricity generation, and this trend has continued.
Natural gas prices and coal’s market share in electricity generation are related. When natural gas prices drop, coal loses market share, as it becomes more economical to use natural gas for power generation. On the other hand, a rise in natural gas prices generally leads to an increase in coal’s market share.
Impact on coal and utilities
Natural gas prices continue to remain subdued. This is not good news for coal producers (KOL) such as Alliance Resource Partners (ARLP) and Natural Resources Partners (NRP).
For utilities (XLU) such as Dynegy (DYN) and NRG Energy (NRG), the impact depends on the level of regulation. For regulated utilities, the impact is generally negligible, as the fuel cost is part of their tariff calculations. For natural gas power plants supplying electricity at long-term fixed price contracts, subdued natural gas prices are a positive.
Continue to Next Part
Browse this series on Market Realist: